The rise in VAT is likely to lead to the loss of more than 200,000 UK jobs, economists and recruiters have warned.
The increase in VAT from 17.5% to 20%, announced in the Budget earlier this week, is likely to cost around 200,000 to 235,000 UK jobs over the next eight to 10 years, experts have calculated.
The predictions add to the gloomy outlook for the UK jobs market. Economists have predicted that unemployment could exceed three million, with up to 725,000 jobs predicted to be lost in the public sector over the next five years as the government attempts to reduce the £156bn budget deficit.
Ortus, an HR recruiter, predicted the VAT rise will cost 201,000 jobs over the next eight years. The calculation is based on Dutch research, which found that a 1% increase in VAT in The Netherlands lead to a loss of 20,000 jobs.
Ortus estimated the increase in UK unemployment using this formula would be far larger because the UK has a much larger workforce – about 31 million people. Therefore, a 1% increase in VAT would lead to 80,815 job losses, according to Ortus.
“At least George Osborne stopped at a 20 [VAT rate],” said Stephen Menko, UK director of Ortus. “The EU allows members to increase VAT all the way up to 25%.”
Meanwhile, David Smith, chairman of the Shadow Monetary Policy Committee, part of the Institute of Economic Affairs, said the VAT rise would increase unemployment by 235,000 over the next decade.
Smith’s figure is based partly on the assumption that a rise in the cost of VAT-related goods and services will lead to higher pay claims by workers, raising costs for employers and depressing demand for labour.